Restitution for Internal Investigation Costs Under the MVRA

The MVRA's Provisions and Purpose

Under the Mandatory Victims Restitution Act (“MVRA”), codified at Title 18, U.S. Code, ' 3663A, federal courts must order convicted defendants to make restitution to the victims of their fraud schemes. A “victim” is a person, including a company, “directly and proximately harmed as a result of the commission of an offense[.]” The amount of restitution is determined by reference to several statutory variables in ' 3663A(b). Generally, restitution should be a combination of the return of property taken or payment for the value of property taken, and payment for expenses incurred as a result of the offense conduct. Separate but related statutes require restitution to non-governmental victims first, before governmental victims, and prioritize payment of restitution over payment of any fines imposed as part of a sentence.

These components of restitution reflect the broad purpose of the MVRA: to make victims whole. The MVRA's congressional history is replete with expressions of this broad purpose. As Congresswoman Deborah Pryce, one of the bill's sponsors, said when the bill was being debated, this is “a bill designed to ensure that criminals pay full restitution to their victims for all damages caused as a result of the crime[.]” (Emphasis added.) The MVRA's purpose is amplified in the U.S. Sentencing Guidelines, which require a court to “ enter a restitution order for the full amount of the victim's loss[.]” Phrases such as “ full restitution” and “for all damages caused” do not beget limitation when applied.

Yet courts have differed when deciding whether the costs of an internal investigation, including attorneys' fees, come within the MVRA's mandatory restitution provisions. Some courts, effectuating the broad purpose of the MVRA, have reasoned that internal investigation costs are the “direct and foreseeable result” of a fraud scheme and thus recoverable as part of court-ordered restitution. Other courts have read the MVRA more strictly, holding that only internal investigation costs incurred in aid of the government's investigation or prosecution are recoverable. As applied to the scenario described above, some courts would order restitution to your company for all of your internal investigation costs, while others would order restitution only for the costs your company incurred working with the government during its investigation and prosecution ' and maybe not even then.

Diverging Appellate Viewpoints

That was the view the U.S. Court of Appeals for the District of Columbia Circuit announced at the end of April 2011 when it overturned a restitution order for the costs of an internal investigation. In U.S. v. Papagno, 639 F.3d 1093 (D.C. Cir. 2011), the defendant had been convicted of stealing more than 19,000 pieces of computer equipment from his employer, the Naval Research Laboratory. The Naval Criminal Investigative Service and the U.S. Attorney's Office in Washington, DC, conducted the government's investigation and prosecution. After the government's investigation and prosecution were well underway, the Naval Research Laboratory conducted its own internal investigation, which cost nearly $160,000. At sentencing, the government requested approximately $160,000 in restitution for the Naval Research Laboratory to cover the costs of its internal investigation. The government's request was based on ' 3663A(b)(4) of the MVRA requiring restitution “for lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” The district court agreed with the request and ordered the defendant to pay the requested restitution to his former employer.

Relying on a narrow reading of the MVRA, the appellate court took the restitution order away from the Naval Research Laboratory because its “internal investigation was neither required nor requested by the criminal investigators or prosecutors.” The court's analysis focused on the part of ' 3663A(b)(4) that mandates restitution for “necessary ' expenses incurred during participation in the investigation or prosecution of the offense.” The Naval Research Laboratory's internal investigation was one of choice, according to the court, undertaken for its own purposes. It was not “necessary” within the meaning of the statute, because neither the NCIS nor the U.S. Attorney's office requested it. While the Naval Research Laboratory's investigation may have assisted the government investigators and prosecutors, its internal investigation was not incident to the Naval Research Laboratory's participation in the government's investigation and prosecution. There is a difference, the court explained, between “assisting” and “participating.” Finally (and dismissively), the court categorized the costs of the Naval Research Laboratory's internal investigation as “consequential damages” which, according to the court, the MVRA does not cover. Perhaps most importantly, the District of Columbia Circuit questioned whether the costs of internal investigations could ever be made part of a restitution order.

Several federal appellate courts already had answered yes, relying on the purpose of the MVRA to effectuate congressional intent to make victims as whole as possible. For example, in United States v. Gordon, 393 F.3d 1044 (9th Cir. 2004), Cisco Systems, Inc. incurred internal investigation costs of more than $1.2 million before and during the government's investigation and prosecution of a Cisco employee who had embezzled millions of dollars from the company. The district court included just more than $1 million in its restitution order to cover the costs of Cisco's internal investigation, and the Ninth Circuit affirmed.

In doing so, the Ninth Circuit reaffirmed broad principles favoring inclusion of internal investigation costs in restitution orders. “[I]nvestigation costs ' including attorneys' fees ' incurred by private parties as a 'direct and foreseeable result' of the defendant's wrongful conduct 'may be recoverable.'” Applying those principles, the court held “Cisco's investigation costs were a direct and foreseeable result of [the former employee's] actions.” The court did not indicate what percentage of Cisco's internal investigation costs were incurred “during participation in the investigation or prosecution” as opposed to those costs incurred for Cisco's purposes ' a distinction that mattered in Papagno ' but also did not express a need to do so. Rather, the court's analytic lodestar was the purpose of the MVRA. “The primary and overarching goal of the MVRA is to make victims of crime whole[ ] ' with uncertainties resolved with a view toward achieving fairness to the victim ' As the victim, Cisco cannot be faulted for making a concerted effort to pick up [the defendant's] trail and identify all the assets he took amid everything he worked on.”

Other federal appellate courts have also recognized that internal investigation costs are a direct and foreseeable result of misconduct that victimizes a company, and have affirmed restitution orders that include investigation costs. In United States v. Amato, 540 F.3d 153 (2nd Cir. 2008), the Second Circuit interpreted ' 3663A(b)(4) to affirm a restitution order covering attorneys' fees and forensic accounting fees of more than $3 million that EDS Corp. incurred investigating an incentive plan bonus scheme engaged in by employees of an EDS subsidiary. As the Second Circuit explained, “Defendants perpetrated a complicated fraud against a large corporation [and others]. That this fraud would force the corporation to expend large sums of money on its own internal investigation as well as its participation in the government's investigation and prosecution of defendants' offenses is not surprising. There is no doubt that EDS's attorney fees and auditing costs were a direct and foreseeable result of defendants' offenses.” Notably, the $3 million restitution order reflected investigative costs EDS incurred before the government's investigation and prosecution as well as during the criminal process. In order to achieve the broader purpose of the MVRA, the Second Circuit interpreted ' 3663A(b)(4) more expansively than the Papagno court. Without adopting a “direct and foreseeable result” analytic test, the Second Circuit was nevertheless motivated to make EDS whole precisely because EDS' internal investigation and associated costs were a direct and foreseeable result of the offense conduct that victimized it.

Exercise Your Rights

That approach is consistent with what Congress intended when it enacted the MVRA. Woodenly applying a victims' restitution statute to deprive a victim ' corporate or individual ' of one of the few ways that criminal prosecutions can actually make a victim whole again is repugnant to the entire statutory victim protection regime that has developed over the last 30 years. When the MVRA was being considered, a Senate Judiciary Committee Report reprised the policy underlying the first victim restitution statute, the Victim and Witness Protection Act of 1982: “The principle of restitution is an integral part of virtually every formal system of criminal justice, of every culture and every time. It holds that, whatever else the sanctioning power of society does to punish its wrongdoers, it should also ensure that the wrongdoer is required to the degree possible to restore the victim to his or her prior state of well-being.” Congress took that responsibility so seriously that, through the MVRA, it made restitution mandatory in many instances.

Businesses that are forced to undertake internal investigations are victimized not only by the fraud the investigation uncovers, but also by the costs expended to uncover it. These are two types of financial harm with the same root cause. To return to the beginning scenario, your company's financial harm in the form of internal investigation costs follows as directly from allegations of a fraudulent invoicing scheme as does your company's financial harm from the fraudulent invoicing scheme itself. To restore your company to its “prior state of well-being,” a restitution order should account for both types of harm. That is precisely what the Second and Ninth Circuits tried to do for EDS and Cisco. Occasionally, federal prosecutors may not be aware of the possibility of restitution for the costs of a company's internal investigation. Do not hesitate to help educate them in an appropriate manner about the “direct and foreseeable result” theory and other theories that appellate courts have developed and approved to allow for restitution for the costs of a company's internal investigation. Full restitution is, after all, a victim's statutory right.

Christopher J. Hunter is a former Assistant United States Attorney and FBI agent. He also has served as Counsel at LibbyHoopes, P.C., www.libbyhoopes.com, in Boston.

The third quarter is about to close, and your legal department remains within its fiscal year budget. Then the phone rings, and your priorities for the rest of the fiscal year and budget for them are blown. It's a senior member of the internal audit team on the line reporting that her group has detected irregular invoicing with four different vendors. What's more, she says, the activity of concern, while seemingly ending last fiscal year, appears to have occurred for more than three years with an aggregate amount at issue approaching seven figures. Countless questions are presented with few verifiable answers. The problem is immediately transformed from an audit issue to an investigation with possible criminal consequences.

Fast forward over the next several months to the conclusion of the internal investigation that outside counsel conducted at your direction. The good news findings are that the managers who were involved in embezzling money from the company through a fraudulent invoicing scheme are gone, and the scheme has ended. The bad news findings are that they stole nearly $1 million, and the cost of the investigation ' company costs and outside counsel costs ' pushed the loss figure higher. Legal expenses will continue, because the local U.S. Attorney's Office has notified you of an ongoing investigation into the conduct that your investigative team uncovered.

If the government's investigation concludes with a conviction of one or more of the perpetrators, will your company be able to recover its internal investigation costs through the criminal process? The company is, after all, a victim of fraud, and one of the statutory rights afforded to crime victims is “full and timely restitution.” The answer is not as clear as it should be.

The MVRA's Provisions and Purpose

Under the Mandatory Victims Restitution Act (“MVRA”), codified at Title 18, U.S. Code, ' 3663A, federal courts must order convicted defendants to make restitution to the victims of their fraud schemes. A “victim” is a person, including a company, “directly and proximately harmed as a result of the commission of an offense[.]” The amount of restitution is determined by reference to several statutory variables in ' 3663A(b). Generally, restitution should be a combination of the return of property taken or payment for the value of property taken, and payment for expenses incurred as a result of the offense conduct. Separate but related statutes require restitution to non-governmental victims first, before governmental victims, and prioritize payment of restitution over payment of any fines imposed as part of a sentence.

These components of restitution reflect the broad purpose of the MVRA: to make victims whole. The MVRA's congressional history is replete with expressions of this broad purpose. As Congresswoman Deborah Pryce, one of the bill's sponsors, said when the bill was being debated, this is “a bill designed to ensure that criminals pay full restitution to their victims for all damages caused as a result of the crime[.]” (Emphasis added.) The MVRA's purpose is amplified in the U.S. Sentencing Guidelines, which require a court to “ enter a restitution order for the full amount of the victim's loss[.]” Phrases such as “ full restitution” and “for all damages caused” do not beget limitation when applied.

Yet courts have differed when deciding whether the costs of an internal investigation, including attorneys' fees, come within the MVRA's mandatory restitution provisions. Some courts, effectuating the broad purpose of the MVRA, have reasoned that internal investigation costs are the “direct and foreseeable result” of a fraud scheme and thus recoverable as part of court-ordered restitution. Other courts have read the MVRA more strictly, holding that only internal investigation costs incurred in aid of the government's investigation or prosecution are recoverable. As applied to the scenario described above, some courts would order restitution to your company for all of your internal investigation costs, while others would order restitution only for the costs your company incurred working with the government during its investigation and prosecution ' and maybe not even then.

Diverging Appellate Viewpoints

That was the view the U.S. Court of Appeals for the District of Columbia Circuit announced at the end of April 2011 when it overturned a restitution order for the costs of an internal investigation. In U.S. v. Papagno , 639 F.3d 1093 (D.C. Cir. 2011), the defendant had been convicted of stealing more than 19,000 pieces of computer equipment from his employer, the Naval Research Laboratory. The Naval Criminal Investigative Service and the U.S. Attorney's Office in Washington, DC, conducted the government's investigation and prosecution. After the government's investigation and prosecution were well underway, the Naval Research Laboratory conducted its own internal investigation, which cost nearly $160,000. At sentencing, the government requested approximately $160,000 in restitution for the Naval Research Laboratory to cover the costs of its internal investigation. The government's request was based on ' 3663A(b)(4) of the MVRA requiring restitution “for lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” The district court agreed with the request and ordered the defendant to pay the requested restitution to his former employer.

Relying on a narrow reading of the MVRA, the appellate court took the restitution order away from the Naval Research Laboratory because its “internal investigation was neither required nor requested by the criminal investigators or prosecutors.” The court's analysis focused on the part of ' 3663A(b)(4) that mandates restitution for “necessary ' expenses incurred during participation in the investigation or prosecution of the offense.” The Naval Research Laboratory's internal investigation was one of choice, according to the court, undertaken for its own purposes. It was not “necessary” within the meaning of the statute, because neither the NCIS nor the U.S. Attorney's office requested it. While the Naval Research Laboratory's investigation may have assisted the government investigators and prosecutors, its internal investigation was not incident to the Naval Research Laboratory's participation in the government's investigation and prosecution. There is a difference, the court explained, between “assisting” and “participating.” Finally (and dismissively), the court categorized the costs of the Naval Research Laboratory's internal investigation as “consequential damages” which, according to the court, the MVRA does not cover. Perhaps most importantly, the District of Columbia Circuit questioned whether the costs of internal investigations could ever be made part of a restitution order.

Several federal appellate courts already had answered yes, relying on the purpose of the MVRA to effectuate congressional intent to make victims as whole as possible. For example, in United States v. Gordon , 393 F.3d 1044 (9th Cir. 2004), Cisco Systems, Inc. incurred internal investigation costs of more than $1.2 million before and during the government's investigation and prosecution of a Cisco employee who had embezzled millions of dollars from the company. The district court included just more than $1 million in its restitution order to cover the costs of Cisco's internal investigation, and the Ninth Circuit affirmed.

In doing so, the Ninth Circuit reaffirmed broad principles favoring inclusion of internal investigation costs in restitution orders. “[I]nvestigation costs ' including attorneys' fees ' incurred by private parties as a 'direct and foreseeable result' of the defendant's wrongful conduct 'may be recoverable.'” Applying those principles, the court held “Cisco's investigation costs were a direct and foreseeable result of [the former employee's] actions.” The court did not indicate what percentage of Cisco's internal investigation costs were incurred “during participation in the investigation or prosecution” as opposed to those costs incurred for Cisco's purposes ' a distinction that mattered in Papagno ' but also did not express a need to do so. Rather, the court's analytic lodestar was the purpose of the MVRA. “The primary and overarching goal of the MVRA is to make victims of crime whole[ ] ' with uncertainties resolved with a view toward achieving fairness to the victim ' As the victim, Cisco cannot be faulted for making a concerted effort to pick up [the defendant's] trail and identify all the assets he took amid everything he worked on.”

Other federal appellate courts have also recognized that internal investigation costs are a direct and foreseeable result of misconduct that victimizes a company, and have affirmed restitution orders that include investigation costs. In United States v. Amato , 540 F.3d 153 (2nd Cir. 2008), the Second Circuit interpreted ' 3663A(b)(4) to affirm a restitution order covering attorneys' fees and forensic accounting fees of more than $3 million that EDS Corp. incurred investigating an incentive plan bonus scheme engaged in by employees of an EDS subsidiary. As the Second Circuit explained, “Defendants perpetrated a complicated fraud against a large corporation [and others]. That this fraud would force the corporation to expend large sums of money on its own internal investigation as well as its participation in the government's investigation and prosecution of defendants' offenses is not surprising. There is no doubt that EDS's attorney fees and auditing costs were a direct and foreseeable result of defendants' offenses.” Notably, the $3 million restitution order reflected investigative costs EDS incurred before the government's investigation and prosecution as well as during the criminal process. In order to achieve the broader purpose of the MVRA, the Second Circuit interpreted ' 3663A(b)(4) more expansively than the Papagno court. Without adopting a “direct and foreseeable result” analytic test, the Second Circuit was nevertheless motivated to make EDS whole precisely because EDS' internal investigation and associated costs were a direct and foreseeable result of the offense conduct that victimized it.

Exercise Your Rights

That approach is consistent with what Congress intended when it enacted the MVRA. Woodenly applying a victims' restitution statute to deprive a victim ' corporate or individual ' of one of the few ways that criminal prosecutions can actually make a victim whole again is repugnant to the entire statutory victim protection regime that has developed over the last 30 years. When the MVRA was being considered, a Senate Judiciary Committee Report reprised the policy underlying the first victim restitution statute, the Victim and Witness Protection Act of 1982: “The principle of restitution is an integral part of virtually every formal system of criminal justice, of every culture and every time. It holds that, whatever else the sanctioning power of society does to punish its wrongdoers, it should also ensure that the wrongdoer is required to the degree possible to restore the victim to his or her prior state of well-being.” Congress took that responsibility so seriously that, through the MVRA, it made restitution mandatory in many instances.

Businesses that are forced to undertake internal investigations are victimized not only by the fraud the investigation uncovers, but also by the costs expended to uncover it. These are two types of financial harm with the same root cause. To return to the beginning scenario, your company's financial harm in the form of internal investigation costs follows as directly from allegations of a fraudulent invoicing scheme as does your company's financial harm from the fraudulent invoicing scheme itself. To restore your company to its “prior state of well-being,” a restitution order should account for both types of harm. That is precisely what the Second and Ninth Circuits tried to do for EDS and Cisco. Occasionally, federal prosecutors may not be aware of the possibility of restitution for the costs of a company's internal investigation. Do not hesitate to help educate them in an appropriate manner about the “direct and foreseeable result” theory and other theories that appellate courts have developed and approved to allow for restitution for the costs of a company's internal investigation. Full restitution is, after all, a victim's statutory right.

Christopher J. Hunter is a former Assistant United States Attorney and FBI agent. He also has served as Counsel at LibbyHoopes, P.C., www.libbyhoopes.com, in Boston.